Attention Please!

Introduction
Behavioral finance literature provides ample evidence of underreaction/over-reaction of investors to news
Momentum trading strategy believes in underreaction of investors
Individuals underreact to positive news and overreact to negative
news

Effect of company specific news depends on the attention of investors

Attention is a scarce cognitive resource
Processing any attention grabbing event requires effort

Sentiment analysis involves mechanical extraction of sentiment score

and reduces mental effort of reader
Advanced language processing techniques generate sentiment score
on any news item at a lightening speed
Investor attention becomes a key factor that corporates may consider
Releasing good news during non-market events and bad news when
investors are distracted may elicit favorable market response

Hypothesis
Non-market events distracts individual investors at least
temporarily, if not for long
During these event windows, any company specific event
goes unnoticed and has muted impact than it would
otherwise have

H0 : Company specific announcements generate zero

abnormal return during non-market events
H1 : Company specific announcements generate non-zero
abnormal return during non-market events

Investor inattention during non-market

events
Anna Hazare Fast (April 5, 2011)
Positive news on Coal India gaining Maharatna status
Coal India share prices fell by almost 2% over the next
two days
Neutral to positive news on Infosys with officials
reportedly in talks to have the IT company set up local
presence
Generated cumulative abnormal return (CAR) of -1%
in two days around the Hazare event

Data & Methodology

Select five non-market event that attract national attention and
look for company specific news inside and outside that period
Include identical number of companies across large, mid and
small-cap category to normalize variation of news flow
attributable to size
Collect company specific news using Factiva
News database offered by Dow Jones
Aggregates information using plethora of news sources

Restrict our sources to BSE Company Announcements,

NewsWire 18 and Reuters
Perform individual searches for all sample companies for each
event window
Exclude multiple occurrences of news and take only that news
which occurs first on any of the included sources

Free text search for company name as key variable in the

headline and the leading paragraph for each of the selected
event window

Data & Methodology

Calculate abnormal returns generated using market model for a period
when investors were preoccupied with a non-market event and call it
Rinside
Calculate abnormal returns for an analogous window when there was
no such distraction and call it Routside
Ri,t = i,t + i,t Rm,t
(1)

ARi,t = Ri,t - i,t + i,t Rm,t

(2)
2
CARit = =1
Use the return on S&P CNX Nifty to proxy for market return
Use a uniform window of 110 trading days across all events and
exclude 10 trading days before the occurrence of the event
Cumulate the abnormal returns for each company inside and outside
the attention period and call it CARinside and CARoutside

Generate CARdiff series as the difference between outside and

inside period cumulative average return

Results

Summary Statistics (Attention Period)

Average CAR

Window

Coal India

Infosys

Motherson
Sumi

Oracle
Financial
Services

Fortis
Healthcare

Hexaware

(-2,0)

0.83%

-0.22%

0.89%

0.57%

-0.71%

3.16%

(-2,+1)

0.04%

0.81%

3.80%

0.22%

-0.97%

1.11%

(-2,+2)

-0.20%

1.97%

4.17%

-1.40%

1.08%

0.31%

(-2,+3)

0.04%

2.49%

3.81%

-0.85%

3.03%

4.38%

(-1,0)

0.66%

-0.08%

-0.67%

-1.77%

0.35%

3.48%

(-1,+1)

-0.13%

0.96%

2.24%

-2.12%

0.08%

1.42%

(-1,+2)

-0.37%

2.11%

2.62%

-3.74%

2.14%

0.62%

(-1,+3)

-0.13%

2.64%

2.26%

-3.19%

4.09%

4.69%

(0,+1)

0.40%

1.06%

2.37%

-2.10%

-0.09%

0.59%

(0,+2)

0.59%

2.21%

2.74%

-3.72%

1.96%

-0.21%

(0,+3)

0.37%

2.73%

2.39%

-3.17%

3.92%

3.86%

ResultsSummary Statistics (Outside Attention Period)

Average CAR
Window

Coal India

Infosys

Motherson
Sumi

Oracle
Financial
Services

Fortis
Healthcare

Hexaware

(-2,0)

2.42%

-0.64%

2.47%

-2.33%

-0.23%

4.07%

(-2,+1)

1.97%

-0.88%

3.53%

-1.02%

-1.06%

4.63%

(-2,+2)

1.57%

-1.01%

2.66%

-1.47%

-0.71%

5.66%

(-2,+3)

2.49%

-1.42%

4.33%

-2.48%

-0.67%

8.29%

(-1,0)

1.20%

0.02%

-0.97%

-2.17%

-0.64%

3.51%

(-1,+1)

0.75%

-0.21%

0.09%

-0.86%

-1.48%

4.07%

(-1,+2)

0.35%

-0.35%

-0.78%

-1.31%

-1.13%

5.09%

(-1,+3)

1.27%

-0.76%

0.88%

-2.32%

-1.09%

7.72%

(0,+1)

0.11%

-0.53%

-0.18%

-0.36%

-0.31%

6.31%

(0,+2)

-0.29%

-0.67%

-1.05%

-0.81%

0.04%

5.64%

(0,+3)

0.63%

-1.08%

0.62%

-1.82%

0.07%

5.59%

T-test of difference of means

H0 : CARdiff = 0
H1 : CARdiff 0
Company

Mean1

Coal India

0.0068

2.8685

0.0089***

Infosys

-0.0190

-9.3022

0.000***

Motherson Sumi

0.0094

-3.1354

0.0048***

Oracle Financial Services

-0.0024

-0.6853

0.5003

Fortis Healthcare

-0.0366

-8.0007

0.000***

Hexaware

0/0677

8.2550

0.000***

Pr ( |T| > |t| )

Note:
1 Mean refers to the difference between outside attention period returns and attention
period cumulative average returns
*** Significant

at 1% level of significance

Conclusion
Company specific announcements have muted impact on
stock performance in the non-market event window
Positive news witness lesser gain and negative news see
lesser losses during distraction periods
Results robust across all events and across all size groups
and the differences in cumulative average returns are
found to be significant
Majority of investors during this period are inattentive
and hence underreact to the positive or negative news

10

Appendix

11

List of Non-Market Events

Date

Non- Market Event

1 05-Apr-11

Anna Hazare fast for Jan Lokpal Bill

2 13-Jul-11

Mumbai Bombings

3 07-Sep-11

Pune Bombings

4 27-May-12

IPL 5

5 01-Aug-12

Pune Bombings

12

List of Company-specific Announcements

Event Attention Company Announcement
Period
Coal India
1
2

3
4
5

No

Coal India arms may be listed over next 5 years

Yes

Coal India given 'maharatna' status; Neyveli Lignite now 'navratna'

No

Source says Coal India may buy majority stake in Australia mine

Yes

Mahanadi Coalfields invites bid for setting up 1,600MW power plant

No

Coal India in talks to buy Indonesia mine

Yes

Coal India Readies.42,000-Cr Investment

No

Eastern state halts operations at six Coal India mines

Yes

Coal India to invest $14.6 bln to raise output in 5 yrs

No

Coal India aims to double South Eastern Coalfield output in 5-6 yrs

Yes

15 Coal India mines may get conditional green ministry nod

13